Mandatory Insurance Flood Insurance Hurricane Insurance FEMA FEMA Insurance

You can own just about anything without insurance, but that does not mean it is a good idea to do so, or that you can go without insurance in all cases. You may be required to obtain insurance on a home if a mortgage company or private lender is involved.

This is a common requirement in lending contracts of all types, particularly in contracts that involve “real property” which is the name for land and the things that are permanently attached to it, like houses. When you own a car, most states require liability insurance if you want to drive the car down the road, but there is rarely any requirement that you maintain physical damage coverage, which pays you directly for damage to your car under your own insurance contract. This would be required however if you took a loan out on the car.

Furthermore, if you own a home and there is a mortgage on it, you may also be required to buy Flood Insurance, which is mandated by the Federal Government for homes that are in designated flood zones. The reason for this is that private insurers learned long ago that the damages from floods were too large a risk, so they excluded flood in most commercially available home insurance policies. This then left the lending industry highly exposed to losses. In order to protect homeowners and the mortgage industry, the U.S. Congress enacted The Flood Disaster Protection Act of 1973, which made the purchase of Flood Insurance mandatory for those owning homes in flood zones and who also had a mortgage.

Since the Federal Government subsidizes Flood Insurance, it is not available to everyone. If you do not live in a flood zone, you cannot purchase Flood Insurance, which makes sense on its face, because flood zones are called that because, well, they flood. Logic dictates that homes that are not in Flood Zones are not susceptible to flood, however there are many circumstances where flooding can occur to homes that are not in a Federally designated Flood Zone. Below grade basements are the best example of this. It is very common that water levels below the ground will swell to the point where they rise higher than the floor of a below grade basement. When that happens, water seeps into the basement through the foundation and can fill a basement with water. A mechanical “insurance policy” to protect homeowners from this type of loss is called a “sump pump” which is basically a pit in the basement floor with an electric pump that pumps water out of the home when the water rises to an unsafe level.

Many insurance companies also offer “sewer backup” coverage, which protects a home in the event of a flooded basement under certain conditions. This coverage however is optional and is usually not mandatory.

Since there is not a requirement that you carry insurance on your home unless a mortgage is involved, why do it? The answer to that is simple. The cost of an insurance policy is normally a very small fraction of the cost to replace a house if it is destroyed by some catastrophic event. If you choose not to buy insurance, you are taking the risk on yourself, which means that you are “self insured.” That means if the house burns down, you have to replace it by yourself assuming you can afford it. If you do not have enough cash to rebuild, then it is time to find an apartment.